EU: European Analyst Explains Why Euro Is Falling

The European Union's common currency, the euro, is continuing its downward slide against other major currencies, this week hitting record lows against the dollar, the Japanese yen and the Swiss franc. The euro's steady loss in value, which began soon after the currency was introduced some 21 months ago, is raising concern about international currency stability.

Even so, European Central Bank President Wim Duisenburg and EU government ministers tirelessly repeat the euro's slump does not reflect an accurate picture of the EU's economy.

What then are the underlying factors that are driving the euro down? RFE/RL Correspondent Breffni O'Rourke asked Adolf Rosenstock, chief European analyst at Nomura International in Frankfurt, for his views.

Prague, 14 September 2000 (RFE/RL) -- Analyst Rosenstock says the state of affairs with the euro is indeed not a happy one and that intervention by the European Central Bank to bolster the currency would not likely be very effective:

"First of all, why I say it does not look too good is the circumstances in the forex markets proper. There is hardly any anti-euro speculation, certainly no big-time speculation like we have seen in the past, in the early [19]90s against the [British] pound, the French franc and the Italian lira. This is absent, so [therefore] it is very traditional flows which have brought about the fall of the euro.
"'Very traditional flows' means it is investment flows into equities, bonds, direct investment, but also trade-related money -- thus nothing really spectacular. In this circumstance, you are quite helpless as a central bank. Even if you want to intervene, it does not make much of a difference."

Rosenstock then addressed the question of central-bank intervention in stabilizing currencies:
"Intervention is only a viable tool if you can lash out and hurt somebody, maybe very badly, and that is when there are big short[-term] positions, so that central banks step in and turn around the markets [by buying the currency to destroy speculators' profits]. And then these shorts have to be closed at a huge loss -- that is how you kill off speculation against a currency. This time, there is no such speculation and there is no target for intervention."

That being the case, Rosenstock was asked, why has the euro fallen so much --particularly since EU economies have recently shown strong economic growth? He replied:

"Here we come to the reason for these [out]-flows. You mentioned that [economic] fundamentals are quite favorable for the [11-nation] euro-zone in general, that is all true. So it is recovering nicely, with growth above 3 percent, and the outlook is quite good -- growth to continue, unemployment to fall, governments doing more or less the right thing. So we could be hopeful.

"However, the attractiveness of the United States' economy remains as high as it ever was over the last two years, and has maybe increased, because now many investors -- many companies, in particular here in Europe -- begin to think that the United States has really begun to embark on a much higher growth trend. We speak of 3.5 percent, some say 4 or even 4.5 percent, whereas Europe [that is, the EU] does not show strong signs of clear acceleration in growth trend, still being at 2.25, maybe 2.5 percent.

If you project these differences into the future over 10 years or 20 years -- that's the time span we are looking at when you are talking about potential growth rates -- you see that the U.S. economy outgrows and outperforms all others, and again will be the dominant player, and [has] by far the biggest share in world GDP 20 years hence. If you are a big company, a vital company with money to spend and invest, where you would put your money?"

Rosenstock was asked whether, because of the euro's decline, the world is heading into an international currency crisis. He said:

"I don't really think so [that we will have a crisis], as long as we do not have rampant anti-euro speculation. You will just see further gradual erosion [of the euro], just like in the last few months, but even in the latest days a cent here and half a cent there do not make a currency crisis.

"This erosion causes only a sense of crisis to appear, because the euro hits new lows every other day. But these lows are only very gradual. Will it bring about intervention or decisive action by governments and/or central banks? I'm not so sure."

So does all this mean that the euro could go on falling to unprecedented lows, to 80 cents, through 70 to even 60 cents. And does this risk bringing chaos to the EU, or can it just carry on? Rosenstock says:

"It is quite difficult, not least because the euro is a currency union, [with] very different features from a national currency. I think it will cause more friction within the [European] Union, finger pointing and 'who's to blame for that?' and 'its a shame' and all those arguments -- so that it will make life in the Union much more difficult, politically speaking. But in an economic sense -- I think you are right -- it will not change that much, there is a little more inflation pressure, yes, but then you have some compensation through better export competitiveness, medium term, so the economy overall can manage.

"And we did have similar currency relations in the past, so it is not completely unknown territory, we have been there before at various times, not just once but at least twice or three times".

Rosenstock went on to say that if one looks at fluctuations in the value of the German mark since 1971, that proverbially strong currency has dived below current equivalent euro levels and bounced back again at least four times. In the early 1980s for instance, it had a level in euro terms of only $0.56.